Sep

Shadow Government Undaunted by Elections

The economy remains flatter than a seltzer bottle in the morning, flanked by whiskey and gin, left uncapped by boisterous partiers the night before. Chairman Bernanke of the Federal Reserve, “Helicopter Ben” for short, remains stubbornly sure that this is due to a lack of liquidity. (Bear in mind that banks hold over $1 trillion in excess reserves.) In an effort to boost lending, which has plummeted despite aggressive inflation and political pressure from Congress and the White House, Bernanke is consider further “quantitative easing.”

Reports the New York Post (it is worth quoting at length):

Prior to its last meeting, the initial estimate for second-quarter GDP was a disappointing 2.4 percent. Now, that figure has been revised down to 1.6 percent, which led Fed Chairman Ben Bernanke to move this close to his second quantitative easing (QE2) plan. The FOMC statement said:

“The Committee will continue to monitor the economic outlook and financial developments and is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate.”

Translation: The Federal Reserve is ready, willing and able to step in and reinvigorate the economy through increased money supply. The economy has suffered a substantial bout of deflation. When a home falls in value from, say, $300,000 to $200,000, that is deflation. [emphasis in original]

In summary: The Federal Reserve inflated like mad to the tune of $200 billion (cascading into $2 trillion due to fractional reserve banking) following the September 11 terrorist attacks, causing a housing bubble which drove the Case-Schiller home price index through the roof. We’re now seeing a return to historically normal levels. The Fed calls this (thus far incomplete) drop “deflation,” but in reality it is just the inevitable, eventual consequence of (deliberate) inflation.

The measure could be as much as $750 billion to $1.5 trillion. And expect far more aggressive purchases than in QE1.

Mortgage-backed securities, the root cause of the economic collapse, will be the cornerstone of the purchases, thereby allowing a possible 10 percent to 15 percent increase in home prices, which would do wonders for the flat-lined economy.

To many, this sounds like a brilliant and pain free escape from the land of economic stagnation. Keep in mind, however, that this has been tried before, and not long ago. The Fed already has $1 trillion on its balance sheet of mortgage backed securities. They purchased these securities after the meltdown of September 2008 to keep the banks from going belly-up. (That’s how that $1 trillion in excess reserves got there in the first place.)

In reality, what this policy will accomplish is to unload all bad debt from banks – private institutions – onto the public. If it works, and if banks begin to lend, we will have rampant inflation. More than likely banks still will not lend, because 1) They’re being paid to keep their cash on deposit with the Fed 2) The Obama administration and the Democrat Congress have created impenetrable political risk for economic forecasters. Why endanger even the modest 0.25% interest for the very real potential of losing money?

After $800 billion of stimulus has failed to make a difference to all who are not politically connected, people are incensed that President Obama would suggest an additional $50 billion that (he claims) would be spent on infrastructure. And rightly so.

Meanwhile, the Federal Reserve, an unelected, unanswerable, politically insulated institution that does the bidding of its political masters and serves only to print money for the government, quietly ponders spending $1 trillion or more, and the average citizen remains unaware. A measure that is 20x larger than Obama’s proposal flies under the radar, the majority of the press too dull to get it, the politicians silent because it feeds the leviathan and (maybe) provides their constituents with illusory prosperity. An entire school of “thinking,” modern “economics,” sings praise for the counterfeiter as if he were a real world deux ex machina. With one notable exception… In days past, one cannot help but surmise that people were not so enamored with titles and degrees that they’d confer magical abilities onto their bureaucrats. Perhaps it is true that hardheadedness in the common man is worth more than all the alleged sophistication of Ph.D. economists flooding out the corrupted academy each year.

To be sure, clandestine operations of a monetary elite will bring down any country if not halted. All price information will be further distorted, leading to economic dislocation (unemployment, shortages, bankruptcies, lack of credit), rising prices, and the erosion of savings (which is what makes the production of new wealth possible in the first place).

If Republicans succeed in getting elected to a majority in Congress, they must put pressure on Bernanke to wind down operations and begin deleveraging as quickly as possible. To ensure that we do not have a spectacular bout inflation followed by a domestic currency crisis, banks will have to fail and merge. They never allowed this to happen in 2008. But inflation has consequences, and we will all pay the piper one day soon.

This post and the contents thereof are the views of only the author identified immediately above and do not necessarily represent the views of the New York Young Republican Club, Inc. (the "NYYRC"), its officers or its members. The NYYRC expressly disclaims responsibility for the contents thereof and by its charter documents may not, and does not, endorse any candidate for any office, except in a general election.